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Federal Open Market Committee
Conference Call
September 24, 1982


Mr. Volcker, Chairman
Mr. Solomon, Vice Chairman
Mr. Black
Mr. Ford
Mr. Gramley
Mrs. Horn
Mr. Martin
Mr. Partee (New York)
Mr. Rice
Mrs. Teeters
Messrs. Guffey, Keehn, Morris, and Roos
Alternate Members of the Federal Open Market
Messrs. Boehne, Boykin, and Corrigan, Presidents
of the Federal Reserve Banks of Philadelphia,
Dallas, and Minneapolis, respectively
Mr. Williams, First Vice President, Federal
Reserve Bank of San Francisco

Staff attendance at this meeting was not recorded in the
Committee's files.

Transcript of Federal Open Market Committee Conference Call of
September 24, 1982
[Secretary's note:
This call began with reports by staff on
recent economic and financial developments. These reports were not
Well, you have had a description, on the
technical side so to speak, of the money situation, the market
situation, the government securities market, and the general stability
elsewhere I suppose it's fair to say. In terms of the general
background, my own conclusion--and anybody can comment on this a
little later--is that it is clear that any sense of economic expansion
has been delayed.
Immediate signs of economic expansion, apart from
as a matter of faith, are sorely lacking. Investment is declining and
is going to decline for some time. The atmosphere, if anything, seems
to be weakening, and survey data seem to show a weakening.
Consumption is rather flat; there is no sparkle to it and that's the
[sector] we have to look to for expansion. It is a situation with
some risks, looked at it just in terms of the internal economy.
As I look at what is going on abroad:
The problems of Mexico
have in no way cleared up; the problems of the rest of Latin America
are clearly being compounded by a general economic slowdown and
recession; there are very few signs of life in Europe; and there's a
weakening, if anything, in Japan from an already not very strong
situation. One gets the same sense [abroad as here] of where the
risks and concerns seem predominantly to be at this particular stage
in development.
I think we have a pretty good record on the inflation side
and, on balance I suppose, things seem to be getting more entrenched
The weaknesses in the financial system remain very evident
both internationally and domestically although I sense--and Peter
might want to comment on this--that there's a little less feeling of
people being right on the edge of their chairs in the financial
markets this week [than there was] maybe two weeks ago.
But they are
not very far back from being on the edge of their chairs. There is
still a lot of differentiation in markets; there is still a relatively
calm and easy situation in the central money market, which has a sense
of calming things, but a very uncertain, nervous atmosphere is
To get to the point, in the end, I think this is a situation
in which I would not find a mechanical application of the reserve
provision rules suitable, given the certainty that that would lead to
a decided change on the tightening side from recent money market
In terms of what seems desirable, that runs against any
other broader background that we see going on.
I feel that at least
for this brief period before we actually meet in a Federal Open Market
Committee meeting, which is about a week and a half off, or seven
working days off, we should not follow--and I would not intend to--a
mechanical application of those reserve provisions but rather
stabilize market conditions somewhere close to where they are
presently or even slightly below where they have been in the last
couple of weeks.

Where are the

[money growth]

figures coming in,


Mr. Chairman?

Do you know what today's report will show?


Minus $1.3 billion on M1, unless that has



[it has not changed].

CHAIRMAN VOLCKER. But the report will show an upward
revision for last week, and that upward revision is related to the
quarterly reporters. Whether it reflects reality or not, I don't
know, but we have what--a $600 million revision?

$700 million.

September] 8th?

A $700 million upward revision.

What will that number be for the

[week ending

MR. AXILROD. The revised number for the 8th will be $461.9
billion. Then there will be a $1.3 billion drop from there, which is
well within the range of market expectations. That's about what they
are expecting--I mean the drop, not the upward revision.

What is your number for the 22nd?

Is it up?

MR. AXILROD. Well, it's very uncertain, but it might be
somewhat above the level of the 8th.
MR. GRAMLEY. Have you figured out what the third quarter
will be relative to the second?
Yes, assuming the growth that we now have, Q3
over Q2 would be 3.8 percent.
Paul, this is Bill Ford. What exactly does the
policy change you are proposing for the next few days mean?
Do you
want to cap interest rates at 10-1/4 percent?
What are you proposing?
I would not call it a policy change.
would say the operational variable would essentially be borrowings of
around $500 to $600 million.

Up from $300 to $350 million, right?

It was $350 million when the period
started but it actually has been higher than that.
We are in a
situation where it has been very difficult to judge the impact of the
borrowings, particularly because of the two special situations.
level of borrowings that we have depends upon what weight we give
those. But it's clearly higher than it was when we started the
period, though much more moderate than it would be if we literally
followed the path.
In other words, we are just moving the path up by
a couple of hundred million.



That's correct.

We are moving the nonborrowed path up,

MR. FORD. But you are not saying that we are capping the
funds rate at 10-1/4 percent?
CHAIRMAN VOLCKER. No, I'm not saying that, but [the higher
path] obviously will have some impact in that connection.
I am
saying--let me not [unintelligible] anybody--that I think it would be
a misguided policy to follow a direction right now that is likely to
create a pronounced increase in interest rates.
exactly right.


this is Frank Morris.

I think you're

This is Ed Boehne.
As far as the general
background on the economy, I think you summarized the situation quite
well. There is just no evidence that I can see that a recovery is in
sight, and now and then I run into people who think that the downturn
may not be over.
However you slice it, there is a great deal of
weakness in the economy. And on that basis, I think your prescription
for policy for right now makes a lot of sense.
So, I will be 100
percent [with you] on that.
CHAIRMAN VOLCKER. Let me just throw in a quasi-fact with
respect to the outlook. The Rinfret survey, which is the first survey
of plant and equipment spending that comes along--I don't know what
reliability our experts would put on it--shows steeper declines this
year and next year than anything that has come out so far.
Are you suggesting, Paul, essentially that we hold
the line until we get together at the next FOMC meeting?
I don't think there's any point to
I don't
That is specifically what I am saying.
discuss beyond that.
think we should let the mechanics drive us before we meet next, a week
from Tuesday.
MS. HORN. Paul, may I just clarify what you were saying
Could you just repeat the number or the
about the borrowing number?
range you were giving and state whether the $150 million of special
borrowing is included in that amount?
CHAIRMAN VOLCKER. I left myself a little range to cover that
possibility; I don't think I want to be that mechanical, Karen. I
But if special
said $500 to $600 million roughly, including it.
borrowing jumped up--if Continental Illinois, say, came in and
borrowed $2 billion tomorrow--I'm not implying that we would
[unintelligible] to offset that.
We'd let that go and print a much
higher borrowing figure.
MS. HORN. Okay. But generally what you're saying is that we
are lowering the borrowing number from where it is and-I suppose the technical way
to put it a little more clearly is that we would raise the nonborrowed
And the
path by a few hundred million from where it would be.
calculation would be in line with what we think would be, by accident


or otherwise, somewhat consistent with the current amount of pressure
on the money market.
MS. HORN. Your feeling is that if we were to stay with the
nonborrowed path, that would perhaps drive fed funds rates up toward
11 percent or above?
CHAIRMAN VOLCKER. Well, I wouldn't put that fine a measure
on it.
There is no doubt that if we followed the path absolutely
literally and didn't use any judgment, it would drive the funds rate
decidedly higher. With what lag I don't know, because it may take
some time for the market to realize it.
More important than precisely
where the funds rate is, I think it could well lead to an impression
in the market for the moment that the whole trend of interest rates
would be reversed.
I just could not predict what impact that would
have on long-term rates and the whole structure of rates generally or
what impact that would have on something like the bank CD rate, which
clearly is affected now, and could be affected a lot more, by simple
nervousness about banks. And the difficulty banks with any kind of
special unfortunate relationship with the markets feel [would be] even
We have had enough indications recently of a tendency [for
investors] to walk away from CDs.
In fact, we now see that, I might
mention, in the aggregate banking data. We see it in two ways:
in an
aggregate decline in CDs, which could be related to other factors but
is suspiciously correlated with the market developments; and we see it
particularly in the troubled banks.
The three or four banks that tend
to get mentioned have a rather noticeable decline in their CD takings.
When would the first weekly figures be published
that would show a significant increase in M1 growth according to
Steve's projections?
In a sense they already do because the big
increase came in the first week [of the month] and we are not
expecting any increases beyond that.
But they are not coming down
enough to give us a low figure. We had some increases at the end of
August and we had that big increase in the first week in July.
despite some subsequent declines, that gives us a big September.

I see.

CHAIRMAN VOLCKER. The current trend is not [unintelligible]
is a message that the System is [now] trying to get out [assuming] we
aren't going to be mechanical about business.
And it's very helpful.
It would seem to me that it would also be helpful if in the coming
days the message could also get out that there may be some special
factors at work here, and in fact that strengthens the case for why
we're not adding a mechanical response.
I think that could be a
positive message to get out.
MR. BLACK. Mr. Chairman, Bob Black. It seems to me that we
have real problems in interpreting these borrowed reserve figures
because we don't know what part is interest sensitive and what part
It's a task, really, to know how the federal funds rate [might
move] more than anything else.
If I interpret what you're saying
correctly, you would anticipate that this lowering of the borrowed
reserve target a little would lead to a decline in the federal funds


No, I don't think that's necessarily true.
The federal funds rate has been as high as 10-1/2 percent; more
recently, it has been as low as a little under 10 percent. All I
would say is that I think it probably would be comfortably within that
If you look at it at least over a period of time, I don't
think I'm talking about any distinct difference in the federal funds
rate. At least I would not expect that.
MR. BLACK. Would you anticipate that the actual level of
borrowing would decline somewhat from where it is now?

Well, where

[is it]?

I don't know.

MR. AXILROD. We're going to publish today a level of
borrowing for the week of the 22nd of $691 million.


[That includes] special borrowing by a large
bank in the week of the 15th--not special borrowing, but borrowing
that occurred at 12 or 13 percent.
So, it probably would be close to
or below the [recent] level.

Yes, in the absence of--

--any special borrowing.

If we had the special or quasi-special
deals waltzing in here, with big amounts of borrowing, it would be
high. And that, of course, was particularly prominent in that one
week when it was over $1 billion.

That's right.

If that happened again, we could get a
bigger borrowing figure.
But I'm talking about what we would aim for.
If those come in, we wouldn't offset them unless we thought there were
some particular reason to.
MR. BLACK. Yes, I can't see any great [need to change] the
borrowed reserve target even though we are running pretty strong. But
I'm not sure it's wise to lower it a bit at this junction. It looks
to me as if it's moving in the wrong direction, really.
MS. HORN. Yes, I share Bob's view on that.
It seems to me,
if it is a [unintelligible] to raise it for a number of reasons that
haven't been discussed here, that unless we see it as something very
negative on the side of causing more volatility in interest rates, [we
should leave it].
I would tend to leave it where it is myself.
CHAIRMAN VOLCKER. Oh, now you're talking about risks.
me leave no doubt.
I see it as extremely negative in terms of
actually precipitating a change in the interest rate quiescence that
we have at the moment.
Precisely what level of borrowings produces
that I do not know. But I'm quite confident about what direction the
risks lie in.


[There is a risk in moving it] to any extent from
where it is now, with the aggregates running so strongly.
If we hold
it, I think the market will understand that there probably are reasons
for not raising it; but if we let if drop, I believe we might get some
negative reactions in the long-term bond market.
The last figures the
Drop it from where?
market has were $1.1 billion or something and $700 million.
If those
figures persist, we'll get a rise in the federal funds rate and other
interest rates if there is no special-situation borrowing.
Well, I was thinking about excluding the special
That was my thought; the interest-sensitive part was the
one that I was not sure we should hold.
And if we end
I'm saying we exclude that.
up at $700 million to $1.1 billion of borrowings, we're going to run a
substantial risk of precisely the type I don't think should be run.
I wouldn't suggest raising it; I was just saying
I'm not sure we ought to lower it.
It's [unintelligible] this week,
if I'm correct on my figures.
And if we came down to $500 or $600
I was saying further that I
million, it would be lower than that.
don't think these figures mean as much now because of the uncertainty
about what part is interest sensitive and what part isn't.
And maybe
The bottom
this is the time really to look at the federal funds rate.
line of what I was saying was that I don't think it would be too wise
to let that drift down from where it is, in view of the strength in
the aggregates.
the federal funds rate.

You may not then achieve your objective


Well, I think we could take into account Bob's
comment about the greater uncertainty with respect to any numbers
about borrowing by giving you a wider range, Mr. Chairman--giving you
a $500 to $700 million range and letting you use that judiciously.
own hunch is that the kinds of reactions in financial markets we are
likely to get, depending on which way we go, are the reverse of those
that Bob Black is worried about.
My perception is that Wall Street
now has a view that interest rates simply can't go up because the
economy is sick, sick, sick.
So, if we started any operation that
began to push interest rates up by reacting strongly to an overrun on
M1 now, that would be the worst possible thing we could do.
I agree with that, Lyle.
I was just saying that
I don't think we ought to take any action that forces the federal
funds rate down at this point.
That was the only point I was making
when I got down to the bottom line.

We're not talking

about that.

It may be of interest to you that I
have had it said to me that people are hoping there will be a bank
failure because then monetary policy [will operate in such a way that]
they know that rates will come down further.


CHAIRMAN VOLCKER. Well, the more cosmic issues we can
discuss a week from Tuesday. Unless somebody wants to say something
more, I think I have a sense of the general thrust of things.

Paul, Roger Guffey.




MR. GUFFEY. My question to you is whether or not this should
be a formal vote for the purpose of directly telling the staff to
adjust the nonborrowed path, so that when the figures are published in
the future the regime that we're allegedly on will be clearly
understood by the markets. We looked at it; we saw great growth and
we were willing to accommodate it because there were all sorts of
reasons why we put our faith on accommodating it.
I'd prefer to see
us actually act on your recommendation.
CHAIRMAN VOLCKER. Well, my sense is--and I recognize your
point--that that is a little difficult to do without lending more
confusion. Let me think about it a little more.
We don't have to do
it today; if we want to come back and do it next week, we can do it.
When I went back and looked at the directive from the previous
meeting, what we are talking about seemed to me to be amply covered.
And the facts will speak for themselves.
We have a sentence almost
directly to this point in the directive.
[Unintelligible] what range of the federal funds
rate you can use under that directive.
I have read that we are indeed
moving to an interest rate target, which I might say I think is
But for the record, I'm inclined to think we
appropriate for a time.
would achieve less confusion if we had a formal vote.
I don't think
you'll have a problem getting [a majority].
Roger, I think what will happen ex post, when
the market players review what we have done and the rationale, is that
inevitably they will read between the lines and add all kinds of
nonfunctional reasons for what we did in addition to our own reasons.
I'd lean against a vote.
CHAIRMAN VOLCKER. I will tell you, when I first thought
about this, Roger, that the idea of having a special decision
published--and it would be published only two weeks from today--as to
why we had to meet specially and change the directive roughly one week
before the next Committee meeting lent a tone to it that I didn't
think would be helpful.
MR. MARTIN. There would be all kinds of fears advanced in
the cottage industry of the Fed watchers.


It occurs to me that it might be very
supportive, for instance, of the Fed's credibility in the sense of our
recognizing what is happening in the economy.
CHAIRMAN VOLCKER. Well, I don't think we can write it today,
anyway. Let me think about it.
I really do not think it is
technically necessary, given the way the directive is written.
Let me



turn it over in my mind again over the weekend as to whether there are
positive advantages in it.
Any other comments?
If not, thank you.
MR. ROOS and others.

Thank you.